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Of all the global economic powers, China would seem the most immune to the threat of a financial crisis.

It sailed through the post-2008 global credit implosion largely unscathed, by pumping up housing construction and infrastructure spending to compensate for slackening exports. First-quarter 2013 growth in gross domestic product, although the weakest in more than two years, rose at a rate the rest of the world would envy, 7.7%. Bad debts inside the Chinese banking system stand at a negligible 1%, compared with 3.4% in the U.S. and double-digit figures in much of the euro zone.

And Beijing seemingly has plenty of additional resources to employ to spur growth. China's economy boasts a debt-to-GDP ratio reckoned conservatively at about 30%, less than half the national debt rate of the U.S. In his recent summit talks with President Barack Obama, China's President Xi Jinping pointedly expressed his satisfaction with the Chinese economy.

But appearances can be deceiving, especially in China. Skeptics always have insisted that China's economic numbers paint too rosy a picture. Now those statistics show a worrisome downshift in growth for both exports and industrial production. Signs of trouble abound.

A post-2008 credit bubble in China seems to be yielding increasingly limp GDP growth, as spending on gaudy new infrastructure projects and housing no longer packs the same punch. Miles upon miles of empty apartment buildings rim hundreds of Chinese cities; industries suffer from rampant over-capacity; and largely empty new highways, bridges, shopping malls, railroad stations, and airports more than hint at problems.

A number of observers, including some former China bulls, see the country headed for a potentially serious economic downturn, or possibly a Japanese-style purgatory of anemic growth, with all the baleful side effects. These could include collapsing prices for assets like real estate (stocks already sell at big discounts), diminishing wealth, and, in extremis, frenzied capital flight by rich Chinese.

"I would say that China is now roughly at the stage [of indiscriminate credit growth] the U.S. was in March 2008, when Bear Stearns had to be rescued and the subprime market was unraveling," says David Cui, Bank of America Merrill Lynch China strategist, working out of Shanghai. "What will tip the scale will likely be a major event in China similar to Lehman's bankruptcy six months after the fall of Bear Stearns, which will be some bailout of a major player that Beijing will do everything it can to disguise so as not to shake confidence."

Echoes George Magnus, a London-based economist and independent advisor to UBS who has written extensively about China: "The financial situation in China has become quite alarming. Cracks are appearing all through its financial structure as a result of debt-fueled overinvestment in infrastructure, industrial capacity, housing, and commercial construction. There's likely to be big trouble coming in the next year or two."

Moreover, a major cash crunch has erupted this month that could be a tell of systemic liquidity problems. Overnight rates in the key interbank credit markets soared last Thursday to more than 13% from under 8% the day before and less than 4% in May. A medium-size state-owned bank, China Everbright, recently defaulted on a six-billion yuan ($980 million) loan from another bank.

Some commentators dismiss the cash crunch as Beijing's attempt to drain liquidity from the system to slow the runaway growth in lending. A flight of foreign capital out of China has also strapped the banking system. But the crunch could be a sign of ebbing confidence in loan quality in the Chinese financial system, similar to what occurred in the U.S. and elsewhere in the fall of 2008 when Libor soared and the credit system froze up.

THE PRIMARY FAULT LINE in the Chinese economy that worries many has been the explosion in the credit-to-GDP ratio since the onset of the 2008 global financial crisis and economic slowdown, as China sought to stimulate its economy in the face of a lag in its longtime growth engine, exports. This total societal debt load has followed a similar growth trajectory to that of the U.S. and British economies in the six years leading up to the 2008 crisis; Japan's credit orgy from 1985 to 1990, a prelude to two decades of stagnant growth punctuated by bouts of deflation, or Korea prior to the Asian financial crisis (see charts below).

According to a report from analysts at Fitch, China's recent credit bubble has topped them all with total debt (a broad measure which includes business, household and local government debt but not central government debt) rising from 130% of GDP in 2007 to 210% in the first quarter of this year. In Japan, by comparison, during the fateful six-year credit bubble, the jump in the ratio was just 45 percentage points, from about 150% to just over 195%.

SUCH RAPID CREDIT booms tend to come to sorrow because of slipshod analysis and misallocation of resources. The quality of China's credit-fueled investment boom in the past four-and-a-half years has been suspect. The obvious low-hanging fruit of projects had already been plucked. Smart investment is far tougher as economies like China move up the value chain.

Likewise, gobs of new liquidity tend to spawn asset bubbles, which can dull the appreciation of risk. With prices of, say, houses in the U.S. levitating upward in the years before the bust, investors become emboldened and lenders confident in the strength of the collateral underlying their loans.

Xi's cockiness in his talks with Obama is understandable. China has enjoyed more than three decades of extraordinary economic gains spurred by the internal migration of workers from the countryside to the city and heavy spending on industrialization and infrastructure improvements. Build it, and they will come. Economic growth can trump mistakes and excesses.

The Chinese credit explosion, however, has sluiced funds into sectors that hold much peril. For example, money has been lavished on giant state-owned enterprises that dominate such key basic industries as steel, cement, electrolytic aluminum, plate glass, coking coal, solar panels, and wind-turbine production. This has created severe overcapacity in these industries that, ominously, has sent China's producer price index into negative territory in the last 12 months, slipping another 2.9% in May, and sharply curtailed corporate profitability.

There has also been a huge surge in infrastructure spending since 2008, primarily on the part of local-government financial vehicles, which are special investment platforms. Many of the projects -- roads, bridges, international ports, and airports -- don't seem to have a good economic rationale.

Apartments of Ordos in Inner Mongolia are mostly empty.
How Hwee Young/Corbis

A new railroad station in Wuhan is like "something out of a science-fiction movie" because of its size, which dwarfs citizens' needs, and over-the-top architecture, says Anne Stevenson-Yang of the Beijing equity research firm J Capital Research. Then there are the gargantuan exposition halls in improbable places such as Hefei and Binhai. Or Olympic-size stadiums in dozens of Chinese cities.

A number of projects have produced allegations of graft, often against party operatives who sometimes demonstrate more interest in getting rich than serving the public.

In any event, many recent, debt-financed projects won't generate cash flow for years, if ever. They were merely big, splashy projects that temporarily boosted employment and economic growth during their construction phase before sinking into a moribund state. The New South China Mall, twice the size of the U.S.'s Mall of America in Minnesota, has been 99% vacant since its 2005 opening.

In fact, a recent working paper by the International Monetary Fund concluded after a cross-country survey that excessive investment on infrastructure and industrial projects, amounting to about 10% of GDP, or about CNY5 trillion, would have "little impact on future growth" or long-term "favorable spillover into household income or consumer spending."

BUT NO CHINA CREDIT STORY would be complete without mention of the real-estate construction boom that has pumped up perhaps the biggest bubble of all. For example, nine times the commercial space sold last year is under construction now. Residential construction has been in a white heat for some time and has attracted much notice in the financial press and elsewhere. Stories about the "ghost city" of Ordos in Inner Mongolia have become a staple, showing the eerie empty streets and deserted modern, high-rise apartment buildings, stores, and public buildings of a megapolis expected to attract more than one million people. It has been empty for the six years since its construction.

Stories abound about similar projects in other cities either still under construction or sitting vacant.

Word came last month that Broad Group, a Chinese maker of central air-conditioning systems, had been green-lighted to break ground this month on the tallest building in the world, near the unprepossessing capital of Hunan Province, Changsha. Sky City, as the project has been dubbed, will include a hospital, school, hotel, and retail and office space in addition to living quarters. And new modular construction techniques pioneered by Broad will enable the company to build the project in just months.

Yet even with the overbuilding, market prices of apartments haven't cracked, at least according to government reports. Developers can still borrow money for new projects even while trying to roll over and carry debt on their inventory of unsold apartments.

Faith remains undiminished that continued migration from the countryside to the cities will cure all housing oversupply. Besides, apartment purchasing has become the No. 1 investment game in China after the stock market crapped out in 2007, with the Shanghai Index falling nearly 70% since.

Apartments are now more than living space -- they have become a store of value and an insurance policy against penury in old age. Living in them or even renting them out is deemed to diminish property value should someone ever show up to lease one. So they remain vacant. Press reports recently said a party official was busted for, among other things, secretly owning some 50 apartments.

A collapse in the Chinese real-estate market would require only a slight shift in investor psychology. And once prices start to crumble, the results to the credit system and, ultimately, the general economy promise to be severe and widespread. Likewise, buildings and land are bedrock collateral supporting many corporate and local government loans.

GONE ARE THE DAYS when the central government exercised tight control over credit through the Chinese banking system, in which it held a roughly 95% stake. The past five years has seen the explosion of China's shadow banking system that largely operates in a regulatory realm outside the direct control of Beijing, and yet last year was estimated to have accounted for more than 45% of China's credit creation.

This burgeoning nonbank channel comprises a crazy quilt of institutions and investing instruments that extends from off-balance-sheet offerings of wealth-management products from traditional banks to the credit wares of brokerage houses, pawn shops, and credit-guarantee loan paper. Even the fast-growing Chinese bond market can be chaotic, with four regulators, poor disclosure, and credit-rating inflation.

The popularity of shadow-banking products is easy to grasp. Chinese consumers are starved for investment yield with official deposit rates set so low. Many private firms lack access to bank lending, either because of government policy or the favoritism enjoyed by state-owned enterprises. But a number of products offered are reminiscent of the worst structured investment vehicles and collateralized debt obligations issued in the U.S. prior to 2008. Their structures are opaque, with debt maturities mismatched with underlying assets, and disclosure is risible.

A credit crisis would likely begin somewhere in the shadow banking system with a large credit default or the bankruptcy of a major player, observes Charlene Chu, Fitch's senior banking analyst in Beijing. "In China, trouble starts on the fringes of the system and then moves into the core," she says.

Signs of financial trouble abound even in China's official numbers, which many say are designed to obscure problems. The post-2008 credit surge, for example, seems to be losing its ability to generate actual growth. During the boom period of 2005 up to early 2008, statistics show that one yuan of credit yielded nearly one yuan of GDP growth. But no more. Last year, it took four yuan to generate just a single yuan of increased GDP, according to government-based figures.

This collapse in capital efficiency indicates several things to China watchers. Much of the money was being wasted, going into projects that weren't generating sufficient ongoing revenues or, possibly, any revenues at all. Likewise, many suspect that much of the new credit went to "evergreen," or roll over, old loans gone bad, or at least coverage of the debt service and operating expenses of debtors with cash-flow problems.

Debt is building up with particular speed in the corporate sector just as revenue growth is flagging. According to GK Dragonomics researcher Andrew Batson, corporate debt jumped from 108% of GDP to 122% just between 2011 and 2012.

Much of that rise is occurring in accounts receivable, or unpaid bills by customers, that reside on the asset side of corporate balance sheets. Official numbers put that total at CNY8.5 trillion in April, up 13% from a year ago. Yet many private estimates claim that the increase may be as high as 20% or more. Zoomlion, China's biggest heavy-construction-equipment maker, has seen its accounts receivable leap to CNY2.7 billion in 2012 from CNY912 million the year before and just CNY106 million in 2008.

The new streets of Ordos in Inner Mongolia are mostly empty.
Nelson Ching/Bloomberg News

At a minimum, the surge in receivables indicates growing liquidity problems in Corporate China. A lot of companies aren't generating enough cash to meet their financial obligations, no matter the degree to which uncollectible receivables might artificially inflate corporate revenues and profits on paper.

Many of the receivables are turned into cash when banks purchase or "accept" them on a discounted basis. These acceptances, in turn, show up as supposedly safe money-market instruments in all manner of investment products sold to households, such as wealth-management investments.

Thus, any surge in defaults on China's pile of corporate receivables, if unchecked, would cascade through the financial system, hurting households, banks, local governments, manufacturers, and the chain of suppliers.

How much debt will go bad is anybody's guess, but the total is much higher than the 1% that Beijing officially reports in the Chinese banking system. Some estimate the eventual total, including sources outside the banks, could be as high as 20% of 2012 year-end total debt of about CNY100 trillion. Losses of just CNY6-7 trillion would wipe out the capital of the state banking system.

BEIJING HAS WEAPONS to fight off a financial crisis, either by directly or indirectly papering over shortfalls, Chu concedes. It could unleash some of the CNY19 trillion that its central bank holds as loan reserves, or deploy the $3.38 trillion (CNY20.7 trillion) in foreign-currency reserves, though much of that has already been committed. Beijing also could sell part of its interests in its state-owned enterprises, though Chu reasons that the central government would be reluctant to dump such assets at "fire-sale prices." As a last resort, China could also print money, adding to the rapid monetary growth of recent years.

China doesn't have to look too far for a cautionary tale. Japan in the late '80s and early '90s faced a similar slowdown in economic growth. Like China today, it sought to compensate by first unleashing a flood of credit, creating a real-estate bubble, and then engaging in infrastructure spending on the proverbial bridges to nowhere.

"But it didn't work, despite the fact that Japan, like China today, boasted a high savings rate, plenty of fiscal capacity, and little foreign debt," says Patrick Chovanec, who spent a decade doing private-equity deals in China and teaching business at Tsinghua University in Beijing, before becoming a strategist at Silvercrest Asset Management, a New York money manager. "The flaw is that sometimes it takes so much capital to fill an existing hole that there's not enough money left to promote growth."

That could be the case for China and its flawed economic model. It is fast running out of effective responses to the iron law of diminishing returns.